Bitcoin’s failed Coup of Wall Street

Why overthrowing the banking system isn’t working, and why we need a new plan

I’m part of an extremely passionate Bitcoin group on Facebook called “Bitcoin and the Internet of Money”. The group established by resident Facebook thought leader Alex Lightman 8 months ago, has grown to close to 3,500 members in that time and is my go to place for all the relevant BTC news across the planet. In the group you will often hear Bitcoiners railing against new regulation, and predicting a future where Bitcoin will destroy the current financial system, banks, and even possibly governments. How will it do all this? By truly democratizing money — the Internet of Money would make centralized control, the divide between rich and poor, the protectionist policies of the FED and central banks all things of the past.

Except it hasn’t happened and isn’t likely to in the current environment. Before you start condemning the central banks, Mt Gox, governments and the regulators of the world for killing off Bitcoin before it has had it’s chance, consider that we’ve got a bigger core problem.

What the numbers tell us

Bitcoin has had some meteoric growth in the last few years appearing from nowhere and taking the world by storm. To hear of Bitcoin on the nightly news, or to see the likes of Marc Andreesen of Silicon Valley putting big bucks behind the future of money like this is already an extraordinary achievement. In November of 2013, traders pushed the value of Bitcoin up to its record peak price of $1,135.00, it then plumeted to near one tenth that value, before recovering. Today (July 21st, 2014) the price is hovering at $622.00 still near half it’s peak back at the end of 2013.

Volatility is hurting adoption

Call it a bubble, call it a Ponzi scheme (if you don’t understand it), or call it (as the US Treasury does) a distributed virtual currency, the biggest problem Bitcoin has had in the last two years has been one of volatility. While volatile commodities make for interesting investment plays for the more aggressive investors amongst us, it rarely is a good thing for a currency or a payments network. Herein lies one of the key problems for Bitcoin, to be a true force for disruption, it needs to be used by large groups of people. But most people like their currency and their bank balance to be highly stable — lack of stability is never going to stimulate mainstream adoption.

If you compare BTC versus the stock market, which is normally considered moderately volatile, it is clear that Bitcoin is still highly volatile — that needs to change before we fix the adoption problem. To be fair, though, it isn’t significantly effecting the market for Bitcoin from a trading perspective. In fact, the volatility may have made it more attractive in the past.

Bitcoin Wallets up, Volume down

Chamath Palihapitiya who joined Facebook in 2007 as VP of User Growth, knows a lot about the mechanics of user adoption. In January of this year, Chamath was one of the largest individual owners of Bitcoin globally, and he predicted that growth would exceed 11.5 wallet downloads in 2014. Since the price has stabilized below $500, however, Chamath has revised his projections lower to a still respectable 7.3m wallets.

Chamath Palihapitiya predicted a slow down in Wallet growth this year

Having said that, 7.3 million wallet downloads is not such a bad achievement right? With 7-10 million new users this year, we could conceivably see 100-200 million Bitcoin users in 3-5 years, which would make it a serious alternative economy. The largest bank in the world ICBC reportedly has 150 million customers, so once Bitcoin surpasses ICBC in terms of value stores or account holders — it’s potentially a very big deal.

The problem is, though, that having more users participate in the Bitcoin economy should mean more usage, more volume of trading, more transaction volume — and that is not what is happening today.

This year Bitcoin trading volume has settled to a level consistent with 2011 volume (See also Bitcoin trading volume stumbles! All time low since 2011!). Transactions per day peaked at just over 100,000 Tx/pday in December 2013, and has since settled back down to a range between 50-70,000 per day.

At around 3 million users in December, we’re looking at an average of just one transaction per month. With double that number of users expected in Q3 2014, and half the transaction volume, we’re looking at a decrease to less than one transaction every two months per user. That is not a growth economy for payments or commerce, it is respectable volume for trading.

Granted 1 year of recent data is not exactly indicative of future growth, but if Bitcoin is going to be a realistic competitor to either existing value stores (i.e. bank accounts) or to existing currencies, then it needs to get the volume up.

How does it compare with other growth we’re seeing in the financial services space right now?

Annual growth in credit and debit card transactional volume is around the 15-20% mark right now, and that is after 30 years of growth and development. In comparative terms Mastercard and Visa process around 66 million transactions per day (source: Payments Source), and PayPal processes some an estimated 9.3 million transactions per day (source: About PayPal), so Bitcoin has a way to go.

Credit/Charge cards and PayPal are both businesses that have been around for more than a decade, so what about new businesses on the growth curve? Based on this excellent Quora analysis, it appears that Square currently is doing about 70,000 transactions per day in the $20 average transaction range. The fact that Square is doing the same volume as Bitcoin doesn’t necessarily mean much, but Square is sweating the small stuff — not relying on big $$$ trades or market price to keep participants interested.

Mobile payments are obviously a key modality growth measure in today’s world of retail financial services. By that measure, one of the most successful growth stories in recent years has been that of Kenya’s MPESA. If we compare mPesa transactional growth since launch to Bitcoin’s growth we get a very telling story.

Comparison of Bitcoin transactional volume with MPesa volume in Kenya

Amplifying Bitcoin

If we’re going to get this right we clearly need mass adoption by consumers, using their Bitcoins every day. This will definitely solve our transaction volume issue.

If we look at the most successful mobile payments initiatives in the US today, then the best candidates would be the Starbucks mobile app, Venmo and Dwolla P2P apps, and the mobile wallets of Google and ISIS. Bitcoin global transaction volume in USD peaked at US$180 million in June according to Blockchain.info, but the problem we’ve got is that it is unlikely that that transaction volume correlates with mobile wallet usage, in fact, we know it doesn’t. If it did we’d see wallet downloads improving transaction volume.

Starbucks and Venmo, however, have both seen considerable mobile payments volume improvement in recent months. During Q1 Venmo (now owned by PayPal) reached the same quarterly volume as Starbucks, and is set for continued growth. It wasn’t that long ago that we had labeled Starbucks as the most successful mobile payments app in the United States.

We don’t have the granularity of data on the transactional side of Bitcoin to know how it compares with the likes of Venmo or Starbucks from the handset specifically, but a recent quote from Venture Capitalist Fred Wilson describes how hoarding is plaguing this sort of mainstream Bitcoin adoption today:

“I also think we need to see real transaction volume happen. Right now, most people who get bitcoin hold it, they don’t transact with it. That’s part of what causes all of the volatility — if there was a very vibrant system where bitcoin was just getting swapped around like crazy, the velocity of the money would cause bitcoin’s price to stabilize and there would be a much more liquid market. I think those are the kinds of things an economist would want to see.”Coindesk, July 21st, 2014

While we’re trading Bitcoin for capital gains, we’re treating it as a commodity. While we’re doing that, we’re not going to see mass adoption of Bitcoin on the payments side, nor as a day-to-day value store (a replacement for the bank account).

What we need is to get Bitcoin wallets on phones, being used everyday. For that consumers need places to spend their Bitcoin — this is good transaction volume, as opposed to bad transaction volume which curtails adoption growth. The only other way to go is to encourage stable growth as an asset class, so that Bitcoin outperforms the stock market on returns, while being less volatile — given Bitcoin’s nature as a pseudo commodity, that is extremely unlikely. If we encourage Bitcoin as an asset class, then the dreams of supplanting the centralized banking systems of the world dies.

In July Dell computer announced that they would start accepting Bitcoin for purchase of their products. That is a huge announcement for Bitcoin. Unfortunately, these types of announcements are just not coming quickly enough to stimulate the right type of growth for Bitcoin.

Let’s face it — when a mobile wallet in Kenya, or a coffee company out of Seattle has more merchant acceptance than Bitcoin, you know we have an uphill battle for adoption. Regardless of what you think of the Blockchain, or the fantastic decentralized model behind Bitcoin, consumer adoption and frequency of use is the best indicator of the ability of Bitcoin to disrupt either payments or the value store model of the existing banking system. That is the problem we have to fix if we don’t want to relegate Bitcoin to a hedge commodity in the medium term.

If you believe in Bitcoin — you need to start spending it, not holding it for asset gain. If you’re not spending it, you’re killing Bitcoin.